Tahoe-Truckee Market Beat: Retirement plans for small business owners
If you’re a small business owner and want to establish a retirement plan that allows you to contribute more than an IRA, Individual Retirement Account, there are several options available.
One is an individual or owner only 401k plan. To be eligible, you have to own your own business with no employees other than your spouse. Currently the elective deferral limit for an owner only 401k is $18,000 per year, or $24,000 if you’re over the age of 50.
The employer can also make a nonelective contribution up to 25% of compensation. The total contributions not counting the catch up contributions for those aged 50 and over cannot exceed $53,000 for 2015 and 2016, according to the IRS.gov website. Employers are allowed to skip contributions or make varying contributions.
Another option is a Personal Defined Benefit Plan. These types of plans are suitable for self-employed people with one or no employees. They should earn over $265,000 per year.
They’re typically best for business owners over the age of 50 who want to make contributions over $80,000 per year and don’t have another employer sponsored retirement plan. These plans require an annual funding commitment and the funding is based on an annual target benefit rather than an annual contribution limit.
The SEP plan stands for simplified employee pension and is suitable for business owners with few or no employees.
With an SEP, a business owner can contribute 25% of their compensation or $53,000 whichever is less. Employers are free to skip contributions or make varying contributions, and SEP plans are the easiest to administer of all the small business retirement plans.
Another retirement plan that is suitable for business owners with less than 100 employees is known as the SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees Individual Retirement Account.
Employees can defer up to $12,500 per year or $15,500 annually if they’re over the age of 50. Employers are required to match employee contributions dollar for dollar up to 3% of their compensation or make nonelective contributions of 2% of their compensation up to the $265,000 annual limit. SIMPLE plans are inexpensive to administer.
If you’re self-employed and desire a secure retirement plan, you have several choices that will help you reach your long term goals.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.